4. When a new information variable is introduced into the contracting setting, the parties always have the
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4. When a new information variable is introduced into the contracting setting, the parties always have the option of agreeing to a contract that ignores the new information. Why is this so? Now return to Example 14.3 and verify that the optimal contract when contracting on output alone is a feasible solution to program (14.5), where the additional information variable is present. Hint: calculate the manager’s certainty equivalent for each of his possible choices, including rejecting the contract.
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